ICIS view: Is Gazprom a willing victim of its price-review pledge?

27 March 2017 05:00 Source:ICIS
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The European Commission is consulting EU market participants on a range of changes that Russian producer Gazprom has pledged to make to its supply contracts with central and eastern European customers.

The commitments, including abandoning destination clauses and enhancing price-review clauses, come as Gazprom seeks to end a long-running antitrust case regarding alleged anti-competitive behaviour in the region.

While it may seem as if Gazprom is succumbing to the demands of the commission, in reality the Russian producer is probably more a willing victim, as the compulsion for it to pre-emptively compete with potential new LNG supply has grown.

With global LNG liquefaction capacity in the early stages of a significant increase and greater import capacity in central and eastern Europe, maintaining market share in Europe is an increasingly pressing, albeit manageable, concern for Gazprom.

The only means for it to do so is through competition and there is little doubt about Gazprom’s ability in this respect.

Surplus production capacity and geographic proximity gives Gazprom the advantage of being a relatively low-cost gas supplier to Europe. At the 2016 Flame conference in Amsterdam, Elena Burmistrova, director general of Gazprom Export, said that Russian gas could compete in Europe below $3/MMBtu. This compares with an average TTF front-month price of $4.55/MMBtu in 2016, which was a 12-year low.

Gazprom’s capacity for competition has always been a potentiality, but the company is only now beginning to face a real compulsion to do so in central and eastern Europe. A key reason for this is local and global LNG fundamentals.

The commission highlighted Poland, Bulgaria, Lithuania, Latvia and Estonia as gas markets that “may have been charged excessively high prices” by Gazprom and all now have some degree of access to LNG supply.

Since the commission formally began investigating Gazprom on 4 September 2012, LNG terminals in Poland and Lithuania have begun operations and import capacity in Estonia could come online by 2020. The Lithuanian terminal can already supply Latvia and Estonia, while the Revithoussa facility in Greece can serve Bulgaria.

Compared to 2012, combined LNG supply to the Greek, Polish and Lithuanian terminals has more than doubled from 976,147 tonnes to 2.4m tonnes in 2016, according to LNG Edge. This is less than a quarter of the aggregate technical capacity across the three facilities, which currently stands at 11 million tonnes per annum (mtpa) with the potential for a further increase of 3.8mtpa in the future.

Norway – priced off the British NBP – and Qatar have dominated supply to Lithuania and Poland so far, with PGNiG in Poland announcing on 14 March that it would double its Qatari receipts to 2mtpa for the 2018-2020 period.

New suppliers could be on the horizon as liquefaction capacity in the US Gulf continues to build. In February 2015, Lithuanian state-owned LNG procurement company LITGAS signed a master agreement with US exporter Cheniere Energy for short-term supply, but is yet to receive a first cargo out of Sabine Pass.

The cost of US LNG cargoes are linked to prices at the Henry Hub spot gas market, with off-takers like Anglo-Dutch Shell and Spain’s Gas Natural Fenosa also paying a fixed liquefaction tolling fee on top of the cost of Henry Hub feed gas.

If favourable, Cheniere Energy and other US LNG off-takers will be willing to sell at European hub prices, which would give them a competitive advantage against oil-linked supply in the event of a recovery in crude prices.

With an increasing number of suppliers on-hand to sell gas at prices linked to European hub benchmarks, the potential for Gazprom’s oil-linked contracts to move above the spot market is more of a risk than it has ever been for the Russian producer’s competitive advantage.

Loosening the link between oil prices and Gazprom’s sales price and allowing for greater alignment with European hubs, which its commitment to contractual price reviews would do, could therefore prove beneficial for the Russian producer itself.

Not only would it retain and cement its edge as one of the lowest-cost suppliers against potential new entrants – US LNG – but it would stack up better against existing oil-linked LNG supply to Europe from Qatar as well. jake.horslen@icis.com

By Jake Horslen